Have you ever wondered how lenders work out whether you can afford a loan? I must admit that sometimes I wonder the same thing.
Different lenders use different formulas to work out how much you can borrow, but the biggest loan isn’t always the best idea. You need to be mindful that online borrowing calculators may assess your “affordability” at a lower rate to what the bank actually use, consequently giving you false expectations.
Being able to secure your ideal loan amount can seem like a battle of balances. Once you’ve worked your budget and finances through a spreadsheet, there’s still one issue left to deal with: assessment rates. This is also known as an ‘interest rate buffer’.
Getting in while the going’s good, and securing your loan while interest rates are low, doesn’t change the fact that lenders are compelled to ensure that you will be able to make repayments if interest rates fluctuate.
Matching the features of a loan to your financial position is also important, and often requires a third-party expert to help guide you through, or answer any questions you may have. It is essential that you fully understand the ramifications of exposing yourselves to debt. When modelling costs and borrowing ability, a good mortgage broker should be somewhat conservative in the figures they are using, as well as being mindful of the assessment rates that various lenders also use.
Assessment rates add a margin to the variable or fixed interest rate of your loan. The assessment rate provides added protection that you will be able to repay your loan when interest rates rise, because they are sure to rise and fall throughout the life of your loan. Regulators are clamping down on lenders exposing people to too much debt and not preparing them for changes in interest rates as well as they could.
The assessment rate can be anything from 1.5-2% above the variable rate, depending on the lender, and many are currently using rates higher than that. Mortgage assessment rates vary from lender to lender, which is why different lenders may offer people in the same financial situation different loan amounts. In some cases, the difference in loan amounts offered by different lenders can go into tens of thousands of dollars, but the biggest loan isn’t always the most suitable. Ensuring that you can pay your loan, whether rates stay low or rise, requires a bit of know-how and this is where I can help.
Please reach out to me on 0431 733 881. I’m happy to answer your questions or help you find the perfect loan for you. Think of me as your mortgage matchmaker.
